Thursday, May 12, 2005

Pension Benefit Guaranty Corporation

Yesterday, I found out about something called the Pension Benefit Guaranty Corporation (PBGC). Apparently, it is a government program to provide surety for the unsustainable pension programs pushed by labor unions and agreed to by for-profit business corporations. United Airlines successfully convinced a judge to dump half of its $10 billion pension obligation onto the federal government. The other half is simply being charged off, and the labor unions are upset about this. They're not upset at this burden being foisted upon the government; they're upset that the government is only being stuck for half of the pension obligations. Kathleen Pender has a pretty good explanation, in the San Francisco Chronicle, of what this will mean for union members' pension benefits and how the PBGC makes the payments.

The PBGC is not a taxpayer funded agency, but a taxpayer bailout of the PBGC could be coming in the near future. The agency ran a $23 billion deficit last year and other airlines are already lining up to copy the move by United Airlines. The Investors' Business Daily has an editorial tying this in with Social Security, which is also an under-funded pension program.

All this has happened because the PBGC for years undercharged on its premiums. So companies never really paid for the risks to taxpayers they incurred. It's a well-known problem in economics. There's even a name for it: Moral hazard.

In this case, companies promised their employees huge benefits based on the idea they would continue to grow, prosper and profit. When the airline, steel and other industries got hit by newer, nimbler competition, they were unable to keep their promises.

There are lessons in all this. One is that the corporation can no longer be viewed as a social-service provider. Companies are in business to turn a profit. They do so by making goods or offering services that people want to buy at the lowest cost possible. Period.

Another lesson pertains to Social Security reform. With $13 trillion in unfunded liabilities, Social Security's problems dwarf PBGC's. Yet, it's pretty much the same deal: Workers have been promised everything, but there's not enough money to pay for it all.

According to an Associated Press article carried in Business Week, the Bush Administration has proposed increasing the premiums that fund the PBGC from $19 per employee per year to $30 per employee per year. I'm not necessarily opposed to the PBGC, but I am extremely opposed to a taxpayer bailout of the program should it be swamped with these over-reaching pension programs, just as I was opposed to the taxpayer bailout of the big anachronistic airlines after the September 11 attacks in 2001. Government bailouts of for-profit corporations subverts the capitalist system by sustaining a corporate value and cost structure above what the free market will bear.

UPDATE 7:41 AM: Vodkapundit has more on this (hat tip: NoSpeedBumps)

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